Question

Dell Computers would like to borrow pounds, and Virgin Airlines wants to borrow dollars. Because Dell is better known in the US, it can borrow $ at 7% and £ at 9%, whereas Virgin can borrow $ at 8% and £ at 8.5%. What should the two companies do in order to reduce the interest rate cost? Calculate savings for each company

Answer 1

Answer:

Both the companies should enter into swap .

That means Dell would borrow dollar at 7% from market and give this loan to Virgin Airlines and similarly Virgin Airlines would borrow pound at 8.5% and give this loan to Dell .

In this way ,Dell would get desired pound loan at 8.5% and hence advantage or savings of 9-8.5=0.5%

Similarly,Virgin Airlines would get desired dollar loan at 7% hence advantage or savings of 8-7=1%